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AMERICAN ASSOCIATION OF WINE ECONOMISTS AAWE WORKING PAPER No. 191 Economics THE COMPETITIVE POSITION OF ONTARIO’S WHITE TABLE WINES Paul R. Masson www.wine-economics.org Jan 2016 AAWE Working Papers are circulated for discussion and comment purposes. They have not been subject to a peer review process. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the American Association of Wine Economists AAWE. © 2016 by the author(s). All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. The Competitive Position of Ontario’s White Table Wines Paul R. Masson, Weatherstone Consulting and University of Toronto1 Abstract Canada has a small, but vibrant winemaking industry. Since the US-Canada Free Trade Agreement (FTA), which went into effect in 1987, growers have shifted to vinifera grapes and modern winemaking techniques and there has been an explosion in the number of wineries, which number about 150 in the Niagara peninsula alone. However, their share of the Ontario wine market, which fell with free trade, has continued to decline. This paper delves into the reasons for the downward trend. Ontario provides a unique source of data on the wine market, since a single price for each wine is enforced by the Liquor Control Board of Ontario (LCBO). The paper analyses data downloaded from the LCBO’s website at the end of 2012 for all Ontario white table wines available for sale, and for wines from both “old world” (France and Italy) and “new world” (Argentina and Chile) wine producers. It is shown that after controlling for wine characteristics Ontario wines are higher priced than their competitors. This helps to explain why, despite improvements in the quality of Ontario wines, the share of imports in LCBO sales has risen. Certain wine varieties, in particular Chardonnay and Riesling, command higher prices, while in Vintages stores (but not in ordinary LCBO outlets), both the age of the wine and alcohol content have a significant positive effect on price. In terms of exports, Canada is miniscule on the world wine market, and it does not have a revealed comparative advantage in wine (except for ice wine). In addition to the disadvantage on input costs, Ontario wine production also suffers from an industry structure that limits the extent that most wineries can exploit economies of scale. A limit in the number of off-winery stores--included in the FTA and subsequently NAFTA to prevent further protection of Canadian wines--has led to an uneven playing field in which two firms, one now American owned, operate the vast majority of those stores. Other wineries are limited to selling through the LCBO or at the winery. Further development of Ontario’s wine industry is likely to require opening up wine retailing to allow all wineries to benefit equally. In order to avoid the strictures of NAFTA, this would have to mean opening up competition to a wider range of wine retailers able to sell both domestic and imported wines. 1 Weatherstone Consulting, Box 1866, Niagara-on-the-Lake, Ontario L0S 1J0, Canada. Email [email protected] 1 Introduction Ontario’s wine industry, which is mainly based in the Niagara peninsula, has matured considerably since the time when Andres’ Baby Duck and Bright’s President Sherry were best sellers2. Until the 1980s, most of the grapes were of the Labrusca variety, including Concord and Catawba, which were hardy but made poor wine. In the face of the removal of protection as a result of the Free Trade Agreement (FTA) with the United States, Ontario grape growers introduced vinifera grapes and improved their grape-growing and wine-making techniques. As a result, Ontario wines no longer are scorned by wine connoisseurs at home and have achieved some recognition abroad. At present, there are more than 180 wineries in Ontario, and grapes are grown on 15,000 acres, making them the province’s largest crop in terms of farm gate value3. Quality of Canadian wines generally has been enhanced by a labeling system, Vintners’ Quality Alliance, which guarantees that a VQA wine is made from 100 percent Canadian grapes4. There are four Ontario wine appellations (Niagara, Pelee Island, Lake Erie North Shore and Prince Edward County) and a number of sub-appellations, describing the geographic origin of Ontario VQA wines. Despite notable achievements, however, Ontario winemaking continues to face important challenges. Imported wine now constitutes more than two-thirds of the Ontario market; in contrast, Ontario wines were over half of domestic wine sales until the 1980s. Two factors clearly contributed to this trend: removal of protection (mentioned above), and the globalization of wine production and trade that has occurred over the past 3 or so decades5. The so-called “new world” producers, including notably Australia, New Zealand, Argentina and Chile, are now exporting large quantities of high-quality wines produced in climates more favourable to grape- growing than Ontario’s—at least for some varietals. Canada does not have an obvious comparative advantage in wine, except in one product, ice wine, for which Canada has established an international reputation. Overall, export sales have not grown to the same extent as increased wine imports. Even on the domestic market, it is not clear how Ontario’s table wines will maintain market share in the face of increasing global competition. In this paper, trends in Ontario’s wine production and sales are described, presenting Ontario’s wine industry in a global context. Data from Ontario’s wine and spirits marketing board, the Liquor Control Board of Ontario (LCBO), are used to compare Ontario wine prices with those of major competitors. In doing so, I focus on white table wines—a market segment in which Ontario wines are traditionally the most competitive—and on wines from four competitors, two from the “old world” and two from the “new”— respectively France and Italy, and Argentina and Chile. Given its unique features and its market niche, ice wine is not included in the dataset, nor are French and Italian wines sold at the LCBO’s Vintages stores, which stock the rarer and 2 For a history of early Ontario winemaking, see Georges Masson (1979). John Schreiner (1984) gives a listing and evaluation of the Ontario wines available in the early 1980s. 3 Grape Growers of Ontario, http://www.grapegrowersofontario.com/ontarios-grape-and-wine-industry 4 See VQA Ontario, http://www.vqaontario.com/AboutVQA 5 See Anderson and Nelgen (2011) for a discussion of major trends. 2 more expensive wines, both imported and domestic6. However, their offerings at the regular LCBO stores are included. The paper goes on to discuss the industry structure for wine-making in Canada. At present, there are two large Canadian (and Ontario) winemakers, namely Vincor (which was taken over by the US company Constellation Brands in 2006) and Andrew Peller Limited (which owns several wineries in Niagara, Nova Scotia, and in British Columbia). These companies have a special advantage in the industry, since they are allowed to operate off-winery stores in Ontario. In addition, they were instrumental in getting government approval for the “cellared in Canada” label, which allows them and other wineries to produce wine made from blends of domestic and imported grape juice, in undisclosed proportions. This wine labelling, combined with their marketing advantage which allows them to undercut higher quality VQA wines from smaller producers, limits further quality improvements for Canadian wines. A concluding section speculates on the further evolution of Ontario’s wine making industry, which seems currently to be in a transitional stage. Ontario has not attracted the attention of oenologists and wine connoisseurs worldwide that other new wine producing regions have— partly, no doubt, because of its limited size. In addition, aside from ice wine, Canada is not known for a particular standout product, such as New Zealand Sauvignon Blanc, Australian Shiraz, or Argentina’s Malbec. The prices of Ontario wines are generally higher than those of imports, for similar quality. To achieve the size necessary for economies of scale so that Ontario’s wines can become more competitive, future consolidation of the industry is likely to be necessary. Greater competition, however, is likely to result not from the expansion of the existing two dominant producers, but from the creation of additional good-sized firms producing VQA wines. The role of the LCBO’s monopoly and the advantages of Vincor and Peller in marketing wine should therefore be re-examined in the context of making the industry more competitive7. Trends in Ontario Wine Production and Consumption Because of its monopoly position in the sale and distribution of wine, the LCBO provides a wealth of data that account for virtually the totality of the wine market in Ontario. Not only are the aggregate volume and price data for all wine sold in Ontario published, the available selection of individual wines is easily accessed online as well as their price. The same is not true of other provinces or countries with more decentralized distribution, in particular where privately-run stores are allowed to purchase and sell wine freely. It is true, as already mentioned, 6 Canadian wines sold at Vintages are included, as are wines from Argentina and Chile. It is argued that given their long-established reputation and premium pricing, the Bordeaux classified growths and finer Burgundy wines of France, as well as the Barolos, Barbarescos, and Amarones of Italy, for instance, constitute market segments in which Ontario wines do not (at least at present) compete.

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